Interest rates around the world have declined to some of the lowest levels in my lifetime of 70 plus years. The 30-year U.S. Treasury was at its lowest yield ever in August1 since being first issued in the mid 1980’s. The long-term (30-year) U.S. Treasury is selling at a yield that is about ¼ of 1% below the Fed Funds rate which is what is known as an inverted yield curve. The inverted yield curve has quite often signaled a recession 9-18 months in advance. A recession is defined2 as two or more calendar quarters of negative gross domestic product growth and is only determined from looking backward.

On a relative basis, interest rates in the United States are actually quite high compared with Europe and Asia (see Chart 1, below).

If one were to review many of these countries’ yield curves, they would find that many of them also have inverted yield3 curves, potentially indicating a future recession.

Delving specifically into Germany, the yield on their 10-year sovereign debt is -0.7%4. This means that if you lend the German government 100 Euros, you will only get back 93 when the bond matures, which represents a loss of about 7%. The same case exists to a lesser extent in France, Switzerland, and Japan.

Given this, the logical question is why would anyone invest for a negative yield? Why have interest rates declined so much when the demand for credit has increased so much over the last 35 years?

We believe such investors are anticipating a period of deflation, as central banks around the world are expected to lower short-term interest rates significantly over the next year in an effort to stimulate growth.

Only in the late 1930’s into the early 1940’s were U.S. interest rates lower than they are today (as measured by the 10-year and long-term U.S. Treasury)5. Looking back at historical rates in the U.S., I did not find any negative rates that currently exist in Germany, Switzerland, Sweden, France, and Japan.

I believe that this means we are likely to see a period of deflation. Goods, services and many asset classes may be selling at lower prices in the future. Deflation should become easily apparent within the next 5 years. We have several investments that we feel will protect our clients as this unfolds.


1Bloomberg L.P. 30-Year U.S. Treasury graph 1/1/1979 to 9/1/2019. Bloomberg terminal. September 12, 2019.
2Bloomberg L.P. Recession Definition. Bloomberg terminal. September 12, 2019.
3Bloomberg L.P. World Bond Markets. Bloomberg terminal. September 10, 2019.
4Bloomberg L.P. Germany Sovereign Debt Monitor. Bloomberg terminal. September 12, 2019. Yield on Long-Term United States Bonds for United States. (online) Available at: September 12, 2019